Airlines have stake in Wall St. reform

The corporate parent of AirTran Airways is jumping into the battle in Washington over government regulation of trading on Wall Street.

Orlando-based AirTran Holdings Inc. is taking a public stand against speculation in world oil markets, saying unregulated trading in that commodity, used to make aviation fuel, is hurting the airline industry as well as forcing up prices for the average consumer.

AirTran argues that airlines have been forced to pull back on growth plans because of the volatility of oil prices. Huge swings in the cost of crude are a burden for an industry whose single biggest expense is often jet fuel.

"Ultimately, it drives up the price we pay, and certainly it drives up the cost of travel to the customer," said Bob Fornaro, AirTran's chairman, president and chief executive officer. "If your No. 1 or No. 2 expense is going up rapidly, it pushes fares up."

Newly focused public and government attention on Wall Street, the result of the financial meltdown that started in late 2007, has allowed the airline industry to revive its complaints about fuel-price volatility in light of Congress' interest in things like derivatives trading.

Fornaro attended a Washington press conference recently in support of a reform bill called the Wall Street Transparency and Accountability Act. The sweeping financial-reform legislation, which has sparked partisan controversy in Congress, has the backing of the airline industry's largest trade group, the Air Transport Association.

"The airlines feel that we need to get back to the point where supply and demand determine what the consumer should pay," said Victoria Day, a spokeswoman for the group.

Airlines say financial speculation, rather than actual global demand for petroleum products such as aviation fuel, is the main reason for oil's price spikes in recent years. They want the trading to be "more transparent, more stable and less subject to manipulation and unacceptable risk-taking," Day said.

The industry notes that, while its use of jet fuel has fallen roughly 17 percent in the past decade because of flight cutbacks and improved conservation measures, its spending on fuel has nearly doubled. At their peak in 2000, U.S. airlines burned 20.6 billion gallons of fuel at a total cost of $16.4 billion; last year, they used an estimated 17 billion gallons at a cost of $32.3 billion.

While airlines certainly don't like paying more for fuel, they're concerned generally about huge price swings, which roil the market and make planning difficult.

For instance, the price of crude oil spiked from $50 a barrel in early 2007 to more than $140 a barrel by mid-2008, then fell to $34 a barrel just a few months later. Since then it has been climbing again, and now stands at about $86 a barrel.

"The consequences are pretty serious," said Dan McKenzie, an airline-stock analyst with Hudson Securities. "It's very hard to plan for growth when you don't know what your costs are going to be."

AirTran is something of a poster child for the problem and for the legislation pending in Congress.

The airline has been struggling with volatile fuel prices for years, and it's more than willing to blame Wall Street speculators for its woes. It is still recovering from a $273.8 million annual loss in 2008, more than half of which was due to fuel-hedging contracts that soured when oil prices suddenly retreated. When asked how much of that could be attributed to market speculation, Fornaro says without hesitation: "Every penny."

During its most recent quarterly earnings call with analysts, the airline reported a first-quarter loss of $12 million, largely as a result of fuel costs. AirTran said its costs for jet fuel swung from $1.59 a year ago to $2.27 a gallon in the quarter that ended March 31. And that includes the effects of hedging, a strategy airlines use to limit their exposure to sharp swings in price. A couple of years ago, it cost $2 to $3 to cap the price of a barrel of oil, Fornaro said; now it costs $8 to $10 a barrel.

"Ultimately, the market can discipline itself and the bubble can pop," Fornaro said. "But the fact of the matter is we pay the price as end users as the market goes through wild swings."